Someone asked why I negotiated up at a yard sale. If someone is going to save me $50-60 in something that will give our family literally hundreds of hours of entertainment, I don’t mind giving him/her an extra Hamilton. It makes the seller’s day and keeps the money in the community. My day (with the savings) and my kids’ days were already happy. It’s a rare, feel-good case where everyone wins.

It was later that evening, during a family game of Rack-o where I had a revelation – my wife was going to win the game. I had a pretty poor board and I pinned myself into needing a couple of specific numbers. Although there were four of us playing, it was a simple matter of process of elimination…

… the other two players were my 5 and 6 year old sons. The game is 8+, so there were no expectations that they would be able to play a strategic game. So jokingly, said that they were a “couple of buffoons.” Everyone laughed because buffoon is a funny word, especially for a 5 and 6 year old.

That’s a long Grandpa Simpson Story way of saying that I hired my sons to do real work. I’m going to pay them real money. They’ll start funding their retirement plan this year.

Kids and Roth IRAs

It’s difficult for a child as young as ours to build wealth. They get money on birthdays and Christmas. Occasionally they give my wife a toy to sell on Ebay. We recently started to have them do some chores around the house for extra money.

Their ability to earn extra money is very limited. The US Internal Revenue Service (IRS) makes it clear that only earned income can be used for a Roth IRA. The problem is that my baby modeling idea never took off. I also don’t see people lining up to purchase their wonderful Pokemon art creations.

For a more detailed look at kids and Roth IRAs, CNBC has a helpful video. It’s especially powerful to see the amazing growth of compound interest over 55 years. Who wouldn’t want 3.4 million in one of their accounts?

So how are they going to earn this money to comply with the IRS’ demands for funding a Roth IRA. I’m going to pay them. Unfortunately, the IRS doesn’t let you pay them for household chores. For many people that’s a show-stopper for kids this age.

I’ve been doing this for three and a half years now, so the kids have grown up with a couple of extra dogs around. They’ve become naturally curious about feeding dogs. They love to play fetch with the dogs. Recently, we’ve introduced them to picking up the dog droppings. It’s a chore that their peers do for allowance. However, for the family dog sitting business it’s a core part of the job.

Feeding dogs, playing with dogs, keeping the water bowl filled, and picking up after the dogs is most of the dog sitting job. These are all things that my kids can do. Occasionally I have to give them medicine, but that’s about the only thing that I need to do 100% myself. The IRS should have no issue with me subcontracting out some of the work to them. In fact, I did some math on what a professional pooper scooper company costs and it seems like it could be thousands a year for the amount of dogs we have and how often they’d have to come.

My kids are going to go into the dog sitting business. I haven’t figured out exactly what I will pay them. I think the professional pooper scooper service may be a good guide. My kids aren’t professionals, but the service doesn’t fill the water bowls or play with the dogs.

Contributing to a Roth IRA at this age is very, very powerful. Money grows quite a bit with 60 years of compounding until they reach ages 65 and 66. If they were to earn 7% interest over that long period of time, a single dollar would be nearly $58. So $1000 in a Roth IRA would be worth $58,000. Of course, at 3.5% inflation over that time, you’d need $7,878 to have the buying power of $1,000 today.

When you crunch those numbers, it gives them a real post-inflation gain of 7x their money. Theoretically, if they could earn the $6000 Roth IRA limit, they’d set themselves up with $42,000 in retirement. Of course, that would be an extreme amount of dog care and that wouldn’t be reasonable.

In addition to the Roth IRA, we’ll be paying them some real spending money. They are saving up for a Nintendo Switch, so we’re going to be creating a chart of their progress.

Finally, in the next couple of years, I’m hoping they can participate in some of blogging work. Perhaps later this year or next year, I’ll introduce a bi-weekly kids article. I’ll interview them and get their perspective on what money-related thoughts they have. I’ll then explore how we are parenting their use of money. This is just a seed of an idea. I need to think a little more about how this would work. Of course, I’d pay them for their time and insight.

Impact on Our Taxes

I have to check on this with our tax planning, but I think we’d make out well with this too. We’d be able to write off the amount we are paying, just as we would a professional service. Of course our kids would have to report the income, but it would be too low for them to be taxed on it. As best I can tell, this (small amount money) wouldn’t be taxed all and, since it is going into a Roth IRA would never be taxed.

I think it gets more complicated with them helping out with the blog since it’s an S-Corp. I may have to set-up payroll and things like that which get a little tricky. I’ll definitely need some professional tax guidance on that.

Again, I’m not sure if my understanding of that is accurate, so please check with your own tax professionals before trying anything like this.

After all, the real buffoon in the game was me. My 6 year old won handily.

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When I started this blog a dozen years ago, I had a goal to create enough passive (or close to passive) income to match my wife’s military pension. She’s eligible to retire very early and I didn’t want to work another 20+ years to begin that next chapter of our lives.

Life throws a lot of twists and turns at you over a dozen years. This blog became an actual source of passive-ish income. I added a dog sitting gig to that. We have some rental properties, which makes landlord another side gig for us. Even though some of these take up some time, I define them as alternative income, because they give me a great deal of work freedom.

For much of that path, I just had the blog in addition to my full-time career as a software engineer. The blog’s income helped to cover some of my expenses. This allowed me to invest more money in my company’s 401k plan. (At the time I didn’t have kids and pets, so putting my time into a side gig was much easier. Nowadays, those side gigs and a couple of others have replaced that full-time career.)

With the benefit of a dozen years of (mostly) a bull market, that extra money has grown well. I, like a vast majority of investors over that time, have been extremely fortunate that the stock market has done better than they probably could have imagined.

I was also very fortunate that I grew up in a household that understood investing. It wasn’t a strange concept to me and I owned my first mutual fund shares somewhere around age 15 or 16. Not everyone has that kind of experience. However, Go Banking Rates has a great guide for first-time investors.

Contribute to a 401k

I didn’t directly invest the side income… at least at first. Instead, I used some of the side income to live off of. That allowed me to direct more of my full-time income to a 401k. For many investors, beginning or expert, contributing to a 401k plan is a wise move. If the side gig allows you to contribute a lot at an early age it is a solid path to financial independence.

If my company didn’t have a 401k, which was common with the types of software start-ups I worked for, I could have used that side gig money towards a solo 401k or a SEP-IRA. Eventually, I did start one of each of those accounts because I moved away from that full-time job with the 401k.

Open a Diversified Investment Portfolio

I’ve reached the point where I’m looking beyond 401ks and other retirement investments. Business Insider has a good list of new apps, software, and programs that make it a breeze for novices to start investing in the stock market without needing a lot of money to do so. I personally use and recommend Robinhood. The reason I love it so much is that they don’t charge commissions to buy and sell stock.

This makes it easy to diversify across a number of ETFs or mutual funds. Currently I like to invest 60% in stocks (40% of that in the US and 20% abroad), 30% in bonds, and 10% in real-estate investment trusts (REITs). It’s not going to weather a stock market downturn completely, but it should provide some safety while also offering growth.

I know that side gigs can be a lot of work and it feels like everyone is already overworked nowadays. However, if you can fit in something on the side, it’s amazing what a difference a couple hundred dollars can make here and there.

This has been a difficult week, so I’ve been doing less writing that usual. The good news is that I have quite a few ideas for future articles.

I recently had a bit of an epiphany. For years, I’ve been investing in Vanguard’s Total Market Index (VTI). My philosophy was that holding all the stocks in one low-expense purchase is the way to go. It’s such a boring thought that almost everyone agrees it is a smart move. In fact, half of you have probably stopped reading this. That’s how boring it is.

I still think that investing in the VTI is a good way to go for many, but I’m thinking of switching up my asset allocation.

The “problem” with VTI is that it’s become extremely heavily weighted in a few companies. You can see the holdings here. You have scroll down a bit and look to the right, but you’ll see the top 10 holdings are 18.70% of the total assets. Five the top six companies are tech… the big names like Apple, Microsoft, Amazon, and Google.

I don’t see any of those companies going away any time soon, but it’s a lot of eggs in that very concentrated area.

What if we invested in a different way. What if we looked at Vanguard’s small capital ETF, VB. It’s holdings are here. (Same deal, you need to scroll a bit and look at the right.) The top ten holdings aren’t the popular names. These are small companies after all. One of the things that stands out to me is that the top 10 holdings are only 3% of the index.

If any one of those companies went away, it’s not going to bring it down much at all. So isn’t it more diversified? It also doesn’t feel like all the companies are in the same industry.

Finally, one could make the argument that small companies might have more room to grow earnings and go up.

I’m not sure how I came to this epiphany, but part of it was that I was thinking about the value of buying local. There’s nothing particularly local about buying a small cap index, but the total market has some big companies that probably don’t need my investment. (The small ones would laugh at the fraction of a share purchase as well.) It just feels like I’m investing more in the mom and pop companies when I’m invested in the small caps.

What does this mean for actually investing performance? Probably not much. Over the long haul, the two indexes are highly correlated, so maybe I am overthinking this.

Realistically, I’d still want to have some money in VTI, but I think I might do more of a 50-50 mix instead of the 90-10 that I have now. What are your thoughts? Let me know in the comments.

Each day I look at how the stock market and my portfolio is doing in my Google Finance Spreadsheet. I know it’s not a healthy behavior, but I can’t resist. For a few minutes the amount of green or red does change my mood. Ugh!

However, sometimes I notice trends in the stocks and index funds that I follow. That is extremely helpful a few times a year.

One of the recent times I noticed a trend was a week or two ago. I noticed that my SodaStream stock had gone through the roof. I did a quick look at the news and it turns out that Pepsi is buying the company at a great premium. Yay!

I’m not interested in owning Pepsi stock. Fortunately, since my SodaStream investment was in a retirement account, I could sell it without tax ramifications. That’s just what I did.

If it had happened a month or two ago, I wouldn’t know what to do with the money. I would have left it as cash and wait for the next buying opportunity. It’s not a couple of months ago, and I currently had a few buying opportunity ideas already on my mind.

Before I get into those ideas, I want to address the obvious. Odds are, you didn’t invest in SodaStream. However, you may still also have some cash to invest.

Perhaps more likely, you have investments in some US stock indexes such as the S&P 500 or the Wilshire 5000. I’ve noticed that the stocks keep hitting new highs day after day. That’s great… Go USA! However, I’ve always been worried that my money is too reliant on the United States. We already have a very large real estate investment here. To make it worse, the United States is central to our main sources of income.

The single biggest point of failure in our diversification is the United States. I like the idea of having money spread all over the world. The best way I know how to do that is to buy more foreign stocks. If you have a similar belief, you might find that you need to rebalance your positions as the foreign stocks are now likely significantly less than the US stocks.

With that as a stepping stone, let’s get started on:

Some Investment Ideas for Right Now

Remember the investing mantra of “Buy low, sell high?” If the United States indexes (or in my case, some event like SodaStream) is high, I look for things that I can buy low. I prefer index funds as they are less likely to have some kind of Enron-like scandal that few people saw coming. (Yet, I still invest in some individual companies, like SodaStream. I never promised that I made sense.) I’ve got three ideas that fit the bill. (I generally prefer ETFs and Vanguard funds when possible due to low expense ratios. Full disclosure: I own all three of these index funds.)

Emerging Markets (Ticker: VWO) – You may have noticed that emerging markets have been on fire lately… unfortunately it’s been a dumpster fire. It feels like they are down 5-6% in just the last week. It’s trading at just around its 52-week low and off 20% from its 52-week high. There’s a lot going around the world that explains it, which I won’t get into here. Things may get worse before they get better. However, over the long haul, I believe that these countries have a greater opportunity to grow as the world becomes more connected. I poured all the money from the SodaStream sale into this index.

Frontier Markets (Ticker: FM) – You almost never see anything written about frontier funds, except for my article on them of course. The countries in frontier funds are very small, so small that they don’t even qualify to be emerging. Here are some example countries: Kuwait, Vietnam, Romania, Nigeria, and Qatar. One of the top 10 holdings seems to be the Bank of Transilvania. As we all know if you default on a loan to the Bank of Transilvania, they send Dracula after you.

Some people will probably call frontier markets gambling, but again, it’s fairly diversified. I wouldn’t make it a big part of a portfolio, but it is worth considering. Like emerging markets, FM is trading near its 52-week low, but off nearly 25% from it’s 52-week high.

Solar Power (Ticker: TAN) – Who loves cancer-causing tanning beds? Not me. Fortunately, this TAN is about investing in solar power companies. I don’t know if too many people doubt that solar is the future. I’m starting to see it everywhere… even on my own home’s roof. It’s trading close to its 52-week low, and off more than 20% from its 52-week high.

Finally, I had one final investment idea that I hesitated to share. I really haven’t looked into the company in great detail, so you’d definitely need to do your own research. It looks like SnapChat (SNAP) is below $10 for the first time in its existence. I do know that they’ve had some horrible earnings in the past, so maybe it is well deserved. However, I know all the kids love the company, and maybe a 12.5 billion valuation is low. I’m really on the fence about this one though, so take caution. I could see Snapchat going away before something like solar power or Transilvania. Full disclosure: I got a few free shares from Robinhood’s free stock promotion.

At the end of day, it’s up to you to manage your money as you see fit. I’m hoping that over the 20-30 years that I plan to keep this money invested, there’s going to be better than average growth than if I just stuck with the United States. If not, I do sleep a little better knowing that my investments are diversified (and backed by Dracula).

(I reached to Live Your Wage about the big difference between a million in net worth and 401k and he admitted his memory in quoting on Twitter wasn’t accurate. However, this article is well worth discussing on its own (lack of) merits.)

The only thing I didn’t realize when reading the Tweet was that the article was written in 2015. That doesn’t matter given that the idea of becoming a 401(k) millionaire is, by its nature, a long journey. When you limited to putting less than $20,000 a year to work, getting to $1 million isn’t going to happen in 3 years. So let’s not label it as being outdated.

This article is going to be a two-fer. I’m going to dispute the Fortune article and then give you some advice that may encourage you.

Where Fortune got it Wrong

We have to start with a couple of base assumptions before we can dig in:

The base assumption is something I mentioned above… getting to $1 million when you are limited to less than $20,000 a year is not supposed to be “easy.” Simple math (without compounding) tells you it will take more than 50 years. How would you react to an article titled, “How easy is it to climb Mt. Everest? Here’s the truth”?

So let’s start with that common sense.

Next, we need to understand this getting to be like Inception. I’m critiquing (this article) a critique (Fortune article) that was critiquing some Fidelity research that was triggered by a Twitter critique.

What’s Wrong with the Fortune Article?

1. Fortune starts with the wrong implication.

The Fortune article starts off with by saying Fidelity’s studies leads to “The implication was that there is an easy prescription to becoming a 401(k) millionaire.” The article that they cite doesn’t appear to do that. It simply states what you need to get there. It was only two steps: start early and save a lot.

I guess you could say that’s a simple prescription, but it’s not easily followed.

2. Author points to his own article about how 401ks failed.

I have no problem with pointing to your previous work, but in 2015 he points to his Oct 2009 article Why It’s Time to Retire the 401(k). The problem with that is the article is based on the stock market crash that relatively quickly rebounded… and by 2015 looks a little silly. In fairness, I could only read the preview as I don’t have a subscription. In any case, pointing to a 2009 market crash as reasoning why 401ks are a failure in 2015 is pretty silly.

I’m not even trying to make a point that 401ks are great. It’s just a terrible justification for why they are bad. It looks even worse in 2018, but I can only judge from 2015.

3. Author looks at Fidelity’s 5 tips.

He didn’t seem to link to Fidelity’s 5 tips. Instead he linked to the NBC News that gave the two tips mentioned in #1. I had to go out and do the work myself. Here’s are Fidelity’s original tips.

4. Tip #1: “Fidelity found that, on average, 401(k) millionaires had worked for the same company for 34 years. And that’s the average!”

The author points out that is very unlikely in today’s world and I agree. However, it’s a backwards-looking stat that may reflect that people used to work at the same job. More importantly, I can tell you that I have a ZERO DOLLAR 401k. Why? Because went I moved jobs, I moved it to a Rollover IRA where I could invest with lower fees. I’m sure some tax experts may disagree due to nuances, but for all practical purposes my Rollover IRA is a 401k.

Technically though, I was eliminated from the 401k millionaire quest because I did the smart thing. I imagine many other people who are saving up large amounts in their 401k do the same thing and are eliminated as well. Thus we are stuck with people who tend to stay at their job and don’t have the option of doing the smart Rollover IRA.

The worst part about the author’s point on this tip is that when you review the real Fidelity article, the tip was really, “Start saving early” and included nothing about needing to stay at the company for 34 years. A previous note in the introduction provided that statistical fact, but no weight was given to it being relevant.

5. Tip #2: “Save a lot. Fidelity says that 401(k) millionaires, on average, put 14% of their paychecks into their 401(k).”
The author: “Most studies put the contribution rate of the average worker at around 6%. And financial planning experts usually say you need to contribute about 10% of your salary to be safe. But that, it turns out, is not even enough.”

I read that walking up 5-6 flights of stairs is average. I’ve seen a study say that walking up 8-10 flights of stairs a day is recommeneded. It turns out, that if I want to climb Mt. Everest, even those 10 flights a day are not enough. The madness!

I follow bloggers who routinely save 40-50% of their money. You want a million dollar 401k and you are going to balk at a few percent of pre-tax money?

6. Tip #3: “Fidelity said one of the characteristics of 401(k) millionaires is that they worked for employers that matched their contributions.”

The author is right on this one. You can’t control it. However, Fidelity points out that 96% of 401k plans (at the time) offer some match and simply suggested that people be aware of making sure that they get the free money. It’s good advice!

This may be a good time to point out that these 401k millionaires today were limited to $15,000 contributions per year for many years. Today, you can contribute $18,500, which gets you to a million dollars much faster.

7. Tip #4: “Be Warren Buffett. In fact, you might have to be a little bit better than him.”

“According to the Fidelity study, the average investment return of the people who ended up with $1 million in their 401(k)s from the middle of 2000 to the middle of 2012 was 4.8%… Over the same period, the average return of the stock market was 1.3%. So, to become a 401(k) millionaire, you had to do three times better than the stock market over the same time period.”

The Fidelity article didn’t seem to say mid-2000 to mid-2012. From January, 2000 to December, 2012 the market returned 1.84% (using this calculator. However, we aren’t comparing money dumped in on January 2000. We are presuming a lot of dollar cost averaging with more money being invested in low points like the crash and ending on a high period.

It’s very much the reverse of the sequence of returns risk that retirees face.

The irony is that Buffett says you should use index funds, which is almost always the very best option in the limited choices available in a 401k. The people in the study didn’t stock pick their way a million dollars and Fidelity makes the point that this step was about asset allocation… something that the author ignores.

Finally, all we need to manage is 4.8% over the long term?!?! Let’s rejoice, because the S&P 500 has returned 9% (dividends reinvested) from 1/1871 to 6/2018 (same calculator as above). Looks like these were very “unlucky” 401K millionaires and it can be reasonably argued that it’s possible to do twice as well as what the author believes is Buffett-like.

8. Tip #5: “Fidelity says not to borrow from your 401(k) or cash it out. That may sound easy enough, but it’s not for many people.”

This step is literally to not do something negative that takes a lot of work to figure out in the first place. It’s almost like saying, “Don’t go rob a bank.” That’s the easiest thing to accomplish and nearly everyone accomplishes it without even thinking about it. You have to go pretty far out of your way to rob a bank and I think we can agree it isn’t something that happens by accident.

Fortune’s Conclusion

Let’s get to Stephen Gandel’s conclusion:

“So that’s it. If you want to end up with $1 million dollars in your 401(k), all you have to do is work for the same employer for more than three decades, save about 40% more than most financial planners dare to recommend, land a job at of the rare companies generous enough to match 5% of your contributions, and totally crush the market, while you go about your normal day job, avoiding all the sudden financial traumas that lead people to borrow against their retirement funds.”

A more realistic conclusion would be:

“So that’s it. If you want to be one of the few who can amass an amazing $1 million dollars in your 401(k), and not other retirement accounts, all you have to do start early, save 4% more in pre-tax dollars than most financial planners consider safe, take advantage of the 401k match, and invest in stock index funds, while being a little lucky to avoid the big financial traumas by possibly having an adequate emergency fund due to living below your means.”

Finally, at the very end of the article Gandel tells us what we already know, but with a bunch of sarcasm:

“It’s easy. So easy that of the roughly 13 million 401(k) accounts that Fidelity administers, a total of 72,379, or just 0.6% of them, have a balance of more than $1 million.”

Once again, Fidelity never said or implied it would be easy. You can search the whole article, it’s just a strawman fallacy that the author invented so he could take a bunch of stuff out of context and spread sour grapes and discouragement.

The sad part is that it seems like people paid money to actually read it.

So You Really Want an Million Dollar 401k?

The first step is throw away the idea that it has to be in 401k. There’s nothing magical about the characters, “401k.” What you probably really want is a million dollars in retirement accounts.

This allows us to include Roth IRAs that, in many ways, are even better than 401ks. It can be withdrawn tax-free (as the taxes have already been paid on it) which is the most obvious advantage. If someone were to offer you a million dollar 401k or Roth IRA, you’d jump at the Roth IRA.

We include Rollover IRAs which I mentioned above is practically the same thing, but with fewer fees. This also allows us to include people who are self-employed. Yes, there’s the solo 401k for that, but it isn’t a 401k in the way that most people think of them.

The next step is to actually follow Fidelity’s study. Start early and contribute a lot. As someone once said, “There’s no trick to it, it’s just a simple trick:”

A couple of years ago, I did the math and found that if you were able to invest $23,000 each year for 20 years you’d have a million dollars. That’s magically turns out to be maximizing your 401k and Roth IRA… assuming you are eligible for both. It also assumes that 7% investment growth.

When I ran the numbers, the interesting thing is that the growth from investment gains was more than the money invested. As you get close to the 20 years your money works much harder for you than you do for your money.

Of course saving $23,000 a year isn’t easy. If anyone ever said having a million dollar retirement is easy or that anyone could do it, they were lying to you.

One thing to keep in mind is that this assumes only 20 years of saving and investing. It’s geared to people who either start late or want to retire early. If you can’t save $23,000, you can still get to a million dollars, it will just take longer.

The math is the math. It doesn’t require you to stay at the same job, get a company match, or invest better than Warren Buffett.

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